- Many projects in the first year will provide an increase to something called ‘working capital’….Does this represent a cash inflow or a cash outflow? Provide an example and explain your rationale.
- What are the disadvantages of using the payback period to evaluate an investment?
- NPV and IRR are methods introduced in chapter 11 which allow you to evaluate an investment. How would you go about applying each of these in determining whether you should accept an investment opportunity or not? For example, let’s say the IRR is 12%…is this considered a good thing or a bad thing? What should NPV show in order for you to consider accepting an investment? (Be sure to incorporate concepts from this week’s material into your response)
- Let’s examine your ability to calculate NPV. Let’s assume a piece of equipment has an implied discount rate of 8% and an initial cost of $1,000,000. The piece of equipment is expected to generate positive cash flows in years 1-3 of $150,000 and years 4-6 of $200,000 and $300,000 in year 7. Let’s also assume that you have to spend $150,000 in year 4 in order to maintain this piece of equipment. What is the project’s NPV? (ignoring income taxes). (Be sure to show your work!)
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